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Halftime Report: Traders Betting On Catastrophe In 2010?

Wednesday, 9 Dec 2009 | 1:31 PM ET

The S&P was little changed on Wednesday as investors weighed a weaker dollar (and resulting stronger commodities) against global credit worries.

Economic data was bullish, with wholesale inventories rising unexpectedly. That reverses a 12-month declining trend. However, the bulls were sidelined by concerns over the credit ratings of Greece and now Spain, which S&P just put on negative credit watch.

But unusual options action leads at least one Fast Money trader to speculate that big investors may be looking at something else all together -- and it's quite bearish.

Fast Money Halftime Report
The Fast Money traders share their market insight and midday trading advice.

What must you know?

In the options pits I'm seeing contango; the vol curve has steepend quite a bit over the past couple months, explains Jared Levy of Peak 6. That means options which expire next year are much more expensive than those that expire this year.

The last time this happened was in March of 2000 – and after that we saw a 49% decrease in the S&P.

It’s very unusual that back month options have such an increase in implied volatility. Typically it’s the other way around. Typically they are much cheaper because volatility tends to rise as the options come due.

It suggests options traders are growing more concerned about catastrophe in the year ahead, Levy concludes.

I also have that trend on my radar, adds Danielle Hughes of Divine Capital. It’s possible it's related to what's going on in Europe; it could generate strong head winds in 2010.

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OIL’S SHARP MOVE LOWER

The Fast Money traders are also closely watching the bearish action in oil , which made a sharp move lower --- to its lowest level in two months as the dollar rose and government data showed that energy demand continues to slump.

Specifically, the Energy Information Administration said gasoline supplies increased while the nation's consumption of petroleum products fell to its lowest level since the week of July 10.

How should you be positioned now?

I had been among the bulls calling for $85 oil -- as a weak dollar trade, admits Steve Grasso. But now I think oil is not the dollar trade it once was, and it’s instead trading on fundamentals. It appears investors are concerned the road to prosperity might be bumpy.

Investors expected to see a larger decline in crude inventories; and the gasoline supplies actually increased, reminds Dennis Gartman. That combined with a dollar that appears to be getting stronger and I just don’t see support for crude oil as this point.

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TRADING THE GLOBE: S&P PUTS SPAIN ON NEGATIVE CREDIT WATCH

As we mentioned above, Standard & Poor's revised its outlook on Spain to negative on Wednesday and warned that the country faced a risk of a debt downgrade in two years if the government did not take tough action.

"In our opinion, reducing Spain's sizable fiscal and economic imbalances requires strong policy actions, which have not yet materialized," Standard & Poor's said in a statement, adding that the country faced a deeper deterioration in public finances and a longer period of economic weakness than it had expected when it lowered Spain's sovereign rating in January.

What’s the trade?

It seems to me that the market has shrugged it off, muses Brian Kelly. Spain as well as Greece and Dubai aren’t that big. The market sees these events as small icebergs. But are Britain and Japan the big icebergs? That’s where I think the market focuses for 2010. I’m playing it by being long the dollar and short the FXY against it.

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OBAMA TRADE: HEALTH INSURERS OUTPERFORMING

Shares of U.S. health insurers rose on Wednesday after efforts to overhaul the health system moved away from creating a government-run insurance plan long viewed as damaging to the industry.

However, gains may have been held back as analysts said new measures that would expand the Medicare government plan to younger adults and require insurers to spend a certain amount of premiums on medical costs presented new potential risks.

Senate Democratic healthcare negotiators agreed late on Tuesday to replace a government insurance option with a scaled-back non-profit plan.

The so-called public option has drawn sharp opposition from the insurers and worried investors over concerns it would have unfair competitive advantages and potentially be the first step in a government takeover of the health system.

What’s the trade?

There are still buyers coming into the sector but personally, I’m nervous, says Steve Grasso. I think the door to some kind of public option is still open.

I’m seeing downside put buying in UNH and WLP , adds Jared Levy. But I don't think it's bearish sentiment so much as traders protecting their long positions.

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FAST & FURIOUS: THE KEY QUESTIONS INTO THE CLOSE

METAL NAMES? With metals outperforming today, should you buy?

I’m a buyer, specifically of steel on stronger than expected auto numbers, says Steve Grasso.

BUY CIENA? With Ciena set to report earnings ahead of the bell, should you buy?

I’m a seller of the Dec. 13 puts, says Jared Levy.

BUY APPLE? Shares of Apple are rallying today, is it time to get back in?

I’m a buyer, says Brian Kelly, with a $188 stop.

BUY DOLLAR GENERAL?Dollar General traded slightly lower ahead of its earnigns tomorrow, should you buy?

I’m a seller into earnings, says Danielle Hughes.

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CHART OF THE DAY: S&P 500

Jared Levy is closely watching trends in the S&P 500. Despite the bearish options activity he told you about above he says, -- I’d be a buyer at these levels, if we bounce off the lower bollinger band, which is about 1085. (Contrarians like to buy when a stock hits its lower band.) However, if we break below that's a change in trend.


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  Price   Change %Change
S&P 500
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CIEN
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DG
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FXY
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UNH
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WLP
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AAPL
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